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Wednesday, Aug. 17, 2011

How to Avoid Paying Income Taxes—Legally

Loopholes and tax breaks favor big corporations

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We've heard for years from the conservative members of the business community that Wisconsin is a “tax hell” for corporations.

But how hellish is Wisconsin's tax policy for SC Johnson, a multibillion-dollar corporation with 12,000 employees and globally recognized products such as Pledge and Ziploc bags?

According to an investigation by the Institute for Wisconsin's Future (IWF), the Racine-headquartered SC Johnson hadn't paid a dime in state income tax between 2000 and 2008—even though its annual sales reportedly exceed $8 billion.

Since SC Johnson is a privately held company, it does not have to disclose its sales, profits or tax filings.

But it has filed income tax returns in Wisconsin. IWF's research director, Jack Norman, said they show that the company had paid no state income tax between 2000 and 2008, the last available return. No other information is available to the public.

Two public companies controlled by Johnson family members—Diversey and Johnson Outdoors—also paid no taxes during the same period, according to IWF's research.

Diversey Inc., which provides commercial cleaning services and is being sold to Sealed Air Corp. for $4.3 billion, paid no state income tax between 2000 and 2009, despite earning $360 million in pre-tax profits in the same period.

Johnson Outdoors, which manufactures recreation products, paid no state income tax on pre-tax profits of $42 million between 2000 and 2008.

In contrast, Johnson Bank, which is also controlled by the Johnson family, has paid $3 million in state income taxes on profits of $219 million between 2000 and 2009. As IWF pointed out, that's a tax rate of 1.4%, far below the state tax rate of 7.9%.

“I think we can take away from this that this is a company that is very aggressive about pushing the line on taxes,” IWF's Norman said.

How Do They Do It?

Based on the limited information the company releases publicly, Norman said there is no evidence that SC Johnson is doing anything illegal to eliminate its tax liability in Wisconsin. But he said that tax loopholes and tax credits given to big corporations allow them to legally reduce—or in SC Johnson's case, completely eliminate—their state income taxes, despite apparent profitability.

SC Johnson's public affairs manager, Stephanie Jarstad, did not respond to the Shepherd's questions on IWF's investigation. But Jarstad did send a general statement about the company's tax payments.

“SC Johnson has not owed Wisconsin state income taxes for the last several years due to a 1984 Wisconsin R&D [research and development] tax credit, which encourages companies to move R&D jobs to the state,” Jarstad's statement reads.

Former Gov. Jim Doyle increased that tax credit in 2009, with the Super Research and Development Tax Credit.

Jarstad also noted that state income taxes are based solely on the sale of SC Johnson products in Wisconsin. Based on those sales, “the company's maximum tax obligation would be less than $500,000 absent any tax credits or deductions.”

SC Johnson's Wisconsin employees paid more than $15 million in personal income taxes last year, and the company paid more than $3 million in state sales and use taxes and almost $3 million in property taxes, according to Jarstad's statement.

Jarstad did not respond to the Shepherd's specific questions about SC Johnson's tax payments, the last time the company's income tax filings were audited, or whether the company's lack of income tax payments was fair.

Shifting Profits to Other States

Can an R&D tax credit completely eliminate a multibillion-dollar corporation's tax liability in the state in which it's headquartered? Possibly, but not probably.

It's more likely that SC Johnson also is using other strategies to reduce its tax payments in Wisconsin. If so, SC Johnson would not be unique in doing this, although these strategies are usually not utilized by your typical mom-and-pop small business.

IWF's Norman said one common tax-reduction strategy is to shift a company's profits into a subsidiary that's headquartered in a state with no corporate income taxes—such as Nevada—or with a company-friendly tax exemption.

For example, Norman said, Harley-Davidson set up a subsidiary to own all of its valuable, globally recognized trademark rights. Anytime a trademarked Harley logo or image is used, royalties are paid to this subsidiary.

While Harley is headquartered in Milwaukee, this subsidiary is based in Ann Arbor, Mich. Why? Because Michigan had created a tax exemption for profits made on “intangibles” such as trademarks, Norman said.

However, Norman noted, Harley-Davidson uses this tax exemption to reduce its tax liability—not to zero it out, as SC Johnson has for years.

Norman said he wasn't sure if SC Johnson used this loophole to eliminate its taxes. But he wouldn't be surprised if it did, since it owns valuable consumer brands such as Windex, Pledge, Glade, OFF! and Ziploc.

“Harley-Davidson disclosed it,” Norman said. (Harley-Davidson is a publicly traded company; SC Johnson is privately held.) “In the case of SC Johnson, it's totally secret. We really don't know exactly what techniques they used.”

SC Johnson's Jarstad did not respond to the Shepherd's request to comment on the company's possible use of a subsidiary for its trademarks and logos.

Can Wisconsin Fully Collect Corporate Taxes?

Can Wisconsin recoup some of the money from profits shifted to another state? Perhaps, according to the Institute for Wisconsin's Future's ongoing research on the state's tax climate.

The Democratically controlled state Legislature passed combined reporting in 2009 so that companies like SC Johnson would have to pay some taxes on profits earned in other states. But Gov. Scott Walker has created new loopholes in the combined reporting law to allow corporations to reduce their income taxes paid in Wisconsin.

One Walker-written tax loophole allows all subsidiaries of a corporation to use one subsidiary's loss to reduce their profits—and, therefore, their income taxes. The nonpartisan state Legislative Fiscal Bureau estimated that the loophole would reduce tax collections in our state by at least $46 million by the end of 2013.

Another Walker loophole bans the state Department of Revenue from challenging a corporation's organization for tax purposes. Previously, a corporation could not tie together subsidiaries solely for the purpose of avoiding taxes. But thanks to Walker's changes, a corporation can organize itself so that it reduces or eliminates the income taxes paid in Wisconsin—and the state cannot object to it.

The Legislative Fiscal Bureau could not estimate how much revenue the state would lose once companies take advantage of this new loophole.

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